CHAPTER 1-NOTES 2

FINANCIAL STATEMENTS OF
NOT FOR PROFIT ORGANISATIONS
IMPORTANT TERMS AND ITEMS
Subscription
Subscription is the main source of income for any not-for profit
making organisation. It is the fee which is received by organisation from
its members, to keep the membership active. It will appear on the debit side
of Receipt & Payment Account and the subscriptions belonging to the
current year will be posted to the credit side of Income & Expenditure.
Honorarium
Special payment made to a person who is not the regular employee of
organisation and rendered some special and extra ordinary service to the
organisation is called Honorarium. This is made on regular basis that is
why it is considered as revenue in nature and will be debited to income and
expenditure account. It is debited to the Income & Expenditure Account.
Legacies
It is the amount received by the organisation under the will of a
deceased person or you can say on death of the contributions. It is the
amount which a non-profit entity receives as per the will of a deceased
person. It appears on the debit side of Receipt & Payment Account.
Life-Membership Fee
Sometimes membership fee is paid in lumpsum amount by some of
the members instead of paying subscription (membership fees)
periodically, then such receipt will be capital in nature as one time payment
is there so credited / added directly to the capital / general fund or can be
shown separately as 'lifemembership account' on the liabilities side of the
balance sheet. It’s a non-recurring nature receipt so it is not credited in
 Income & Expenditure Account but added to Capital Account or shown
separately on the liability side.
Funds
It is the method of keeping accounting records in which an amount is
set aside for some specific purpose and cannot be used for any other
purpose.
TYPES OF FUNDS
(a) Unrestricted Fund or General Fund or Capital Fund
As its name shows, the fund which does not carry any restriction
and management can use this fund to fulfill the objectives of the Not-
for profit making organisation for which it exists, then it is called
unrestricted fund. This fund is also called as general fund or capital
fund. It can also be called as operating fund. The fund includes all
unrestricted grants, gifts and incomes or contribution in terms of
donations.
(b) Restricted Fund / Special Fund / Donor Restricted Fund
When some restrictions are put on the use of fund by the fund
provider then it is called restricted fund or you can say donor restricted
fund. This fund can be used for the specified / restricted activity only.
(c) Endowment Funds
This fund is created from legacy, bequest or gifts received by
Not-for profit making organisations. The assets so contained by the
organisation which is donated by the donor and fund is created with the
condition that only the income earned by these assets can be used for
the purpose stated in the articles of association of those organisations
and not the principal amount will be used.
FUND BASED ACCOUNTING
It is exception to this rule that all items of income and expenses will be
shown in income and expenditure account. The features of fund based
accounting are:
(1) Separate funds are created for the fulfillment of some certain
objectives.
(2) The funds can be used only for those purposes for which they are
created.
(3) Each fund has a separate entity for accounting.
(4) Investments of these specific funds will be shown separately in the
asset side of balance sheet. For example, prize fund investment,
building fund investment etc.
(5) Income from a specific fund investment will be directly added to the
specific fund and not created to the income and expenditure account.
(6) Expenses related to fund will also be deducted from that fund directly
and not debited to the Income and Expenditure account. However, if,
after adjustment of income and expenses the balance in specific or
special fund is negative, it is transferred to the debit side of the Income
and Expenditure Account.

THIS CLASS NOTES ARE PREPARED ONLY FOR THE STUDENTS

OF CHAVARA VIDYAPEETH, NARSINGHPUR, MADHYA
PRADESH

Mr. Arun Kizhakkeyil-8770997743

Monday, April 22, 2021